Wednesday, May 13, 2009

Asian Economies Are Likely to Be First to Recover

South Korea’s exports rose by a seasonally adjusted annualised rate of 53% in the three months to April compared with the previous three months, Goldman Sachs estimates; Taiwan’s grew by an annualised 29% over the same period. China’s exports over the last few months have only managed to stabilise, but its industrial production jumped by an annualised 25% in the past three months.

Economists are revising up their forecasts for China’s GDP growth this year: 8% may now be possible even if American consumers continue to be frugal. There is a widely pedalled myth that China’s growth depends on American consumers. In fact, if measured on a value-added basis (to exclude the cost of imported components), China’s exports to America account for less than 5% of its GDP.~The Economist article "Crouching Tigers: Asian Economies Are Likely To Be The First To Pull Out of the Global Recession"

7 Comments:

I used to value the opinion of The Economist quite a bit. But then they voiced their unconditional support for the massive inflating that central banks the world over engaged in these last few months to prevent the bursting of the economic bubble.

It's hard to take seriously a magazine with such a definitive title that does not even understand that you cannot get out of a rough patch brought on by too much debt and spending by spending even more and creating unprecedented levels of indebtedness.

(Please note that this is *not* an ad hominem attack. It is "ad magazinum", which is completely different, and may not even be a logical fallacy.)

The Economist magazine states: "There is a widely pedalled myth that China’s growth depends on American consumers. In fact, if measured on a value-added basis (to exclude the cost of imported components), China’s exports to America account for less than 5% of its GDP."

The statement is a contradiction. It states China is not dependent on the U.S. consumer for growth and then states the U.S. consumer accounts for about 5% of China's GDP. The U.S. had a $233 billion trade deficit with China in 2006.

Jeff, the "rough patch" was brought by restrictive monetary policy and contractionary fiscal policy. Central banks need to increase the money supply for households to consume and pay-down debt. Here's what Bill Gross of Pimco stated in Jan '07:

Bloomberg's Tom Keene: "Bill [Gross], your note every month is always interesting. This last one is one of my favorites. As you know, I'm a big fan of nominal GDP - this, folks, is real GDP plus inflation. It's the 'animal spirits' that's out there. You say be careful, Bill Gross. It looks real good to me, Bill. I see 6% year-over-year nominal. You say that's going to end?"

Pimco's Bill Gross: "I think almost assuredly, because of oil prices. I'm not suggesting it end because of real growth going down - that's the Goldilocks scenario in which we have 2% plus or minus real growth. With oil prices doing what they're doing - if they hold in the $55 range - gosh, we're going to see CPI prints y-o-y over the next three or four months of 0.5% or 1.0% and that means nominal GDP is down in the 3% range. "Ultimately, the inflation component affects the real growth component. To the extent that you have nominal GDP - in my forecast 3 to 3.5%, that's really not enough growth in terms of the economy itself to support asset prices at existing levels. And so, declining assets prices ultimately factor into eventually lower real growth. But that's not for mid-2007 but perhaps for later in the year."

Tom Keene: "When we look at six months of low nominal GDP, is that enough to link directly into the 'animal spirits" of the business investment component of GDP - the "animal spirits" of business men and women?"

Bill Gross: "Well sure it is. When you realize that the average cost of debt in the bond market - and therefore in the economy and this includes mortgages - it is about 5.5%. If you can only grow your wealth and service that debt at 3.5% rate, then that has serious implications. When you go back to 1965, Merrill [Lynch] did this study - in terms of asset prices during periods of time when nominal growth grew less than 4%. Risk assets have been negative in terms of their appreciation and actually bonds have done pretty well. The question becomes why hasn't that happened yet, and I think we're simply in a period of time where there are leads and lags that are much like the leads and lags of Federal Reserve policy."

Jeff, Peak trader, to me one of the real questions is how can we grow if we are a) increasing our debt enormously, b) not allowing for investment in basic sectors like energy (coal, oil, nuclear) and c) increasing taxes to pay for more "government service" sectors.

According to my logic, growth will be nil.

Jeff, good blog by the way, I tried to add a comment but for some reason there was always lack of info on something.